Michael Portillo is one of the most mercurial British politicians of his generation. He entered political life in 1976 at the Conservative Research Department and three years later was responsible for briefing Margaret Thatcher before her General Election press conferences. Some might argue that he was instrumental, from an unelected position, in earning her Cold War nickname, ‘the Iron Lady’. He first entered parliament in 1984, winning the Enfield Southgate bi-election, after a period advising the then Chancellor (Finance Minister) Nigel Lawson. He entered government in 1986 and held three cabinet positions, Chief Secretary to the Treasury, Secretary of State for Employment and Secretary of State for Defence. It has, however, been far from smooth sailing on Portillo’s political vessel. From the highs of Cabinet posts, he lost his seat in 1997, only returning two years later through the ‘safe seat’ bi-election of Kensington and Chelsea. A mark of the political clout he had built up in office showed when William Hague swiftly appointed him Shadow Chancellor, a position he held until September 2001. After resisting serious pressure to stand for the Conservative party leadership after Iain Duncan Smith was recently deposed, he has now decided to leave politics at the next election ‘to pursue other interests’. These might include corporate positions (he is a board member of BAE Systems plc) and international charities. He is already a member of the International Commission on Missing Persons in former Yugoslavia. During his years in office, Michael Portillo travelled often to the Gulf region and can claim to know it well. He has just been in Oman, where he addressed the CxO conference, made up mainly of corporate leaders and the finance industry, to talk about the economic fallout from 2003 and to speculate about the prospects for 2004. While he was there, the only UAE publication to which he gave an interview was Arabian Business. Extracts follow. Are you surprised at the lack of impact the Iraq war had on the GCC economies in general? It has been a curious year in which there has been a great deal of gloom generated by the Iraq war, which has been strangely at variance with the underlying economic factors. We have ended the year with the confirmation of United States growth and even some signs of European growth, but actually, throughout the year, the indicators in the GCC area have been very good. Of course, we should remember that these are still very oil dependent economies and the oil price has been strong recently. One of the reasons that the oil price went strong was fears about the impact of the war on the oil price, so there is a paradox here in that the region which, from afar, would seem to be the most adversely affected, actually feels the positive impact of better oil prices. And yet there is a real realisation within the region that there is a need to diversify. Are countries here, in your view, diversifying quickly enough? Let me put it this way, they certainly have not reached the ideal destination yet. These economies are very dependent on oil and therefore on oil prices. The 20 year perspective is that developing countries that are oil dependent have actually experienced lower rates of growth than developing countries in general, and I think that is because those countries had been led into some sort of complacency that oil would see them through. They have tended to boost government expenditure and that government expenditure itself has been vulnerable to fluctuations in the oil price. You quoted George Bush quite extensively during two speeches and it has been clear from the questions that there is still a lot of speculation about the US agenda. What do you believe is the real US agenda in the region? I think US foreign policy has been fundamentally changed by September 11 and that evolution of those policy changes continues. The first phase was to declare a war against international terrorism and to define America’s enemies as those who harboured, or aided and abetted terrorists. The second phase was to assert that the United States, acting, in its own eyes, in pursuit of the agenda of international organisations [a reference to the United Nations], had the right to intervene in sovereign nation states and change their government. And the third important element is that the United States is committed, for decades to come, to the advancement of democracy throughout the world and, specifically, throughout the Middle East region. My thesis is that the US demonstrates that it means what it says. The declaration of war against terrorism has been followed by a war against Iraq and the declaration of democratisation is not going to lead to any wars, but it is going to lead, I think, to intense diplomatic pressure, with the US putting democratisation at the top of the agenda in its bilateral relations with states around the region. So, no hidden agenda, in your view, to steal the Iraqi oil at bargain prices and the other horrors we hear about? No. I think that the United States’ agenda is much longer term than that. The US believes very strongly in economic freedom, not least because the US has a great deal to benefit from it if the world moves towards economic freedom. Partly, it would tend to underpin political stability, so the US would be drawn less into resolving regional conflicts and, also, successful economies will be trading with the United States and would provide the US with even better opportunities. I think the United States’ economic agenda is much more long term than simply wishing to have the oil from a particular country or invest in a particular country. Those factors are somewhat at the margin given the size of the US domestic economy. Turning to pan-regional issues, you described yourself today as now being ‘a Euro-sceptic Brit’, so what do you feel about moves in this region towards economic unity? I think there are strong reasons to believe that economic unity might be a successful policy for the region. Those being, in particular, that policy co-ordination gives the countries of the GCC a better chance at resisting together the shocks that are likely to occur from time to time as oil prices move up and down. There are, however, immense policy challenges ahead. There is very substantial divergence in the economies of the region. Although they are all oil dependent, they are dependent to differing degrees. Their inflation rates are different. Some of them have [balance of payment] deficits, some have surpluses. Some of them have more developed stock, bond and capital markets than others and those things need to be resolved, not to say also that they need to create institutions for the purpose. A properly functioning central bank for the GCC area [and] properly effective monetary policy instruments will, I think, imply reforms to make labour markets more flexible. An issue that’s arisen during this conference, which I think is interesting too, is that, whereas the Europeans had the strong incentive [to create the European common market] of very highly developed trade between the nations, the GCC is moving into this without there being highly developed trade between the member countries. What lessons do you believe are to be learned from the European experience? For instance, the GCC is implementing a customs union and they are working towards monetary union by 2010. Monetary Union by 2010 seems to be an extraordinarily challenging target. However, having said that, Europe also committed itself to monetary union on a very challenging timeline and achieved it. It would be very surprising if the customs union itself did not increase trade in the GCC area and it would very surprising indeed if monetary union did not increase trade between member states. What the GCC might need to look at from the European experience is that monetary union is tough and, once you have decided that you are not going to have any exchange rate flexibility, it means that the shocks have to find their way into other parts of the economy. In Europe they have found their way into inflation and unemployment and therefore monetary union is not something to be entered into lightly. It will probably require reform, not just in the monetary field, but across entire areas of economic and social policy. Is one of those reforms to cut free from the dollar peg? Maybe. I understand the attraction of pegging a currency to the dollar. It is a huge symbol of ‘being serious’, which is sent to the rest of the world, so I would not propose in the short term that the dollar peg be scrapped. But, one of the reasons for wanting to go into monetary union is to try to reduce exchange rate risk and, if the currency is going to be pegged to the dollar, then you have all the risks of the dollar moving up or down. And the dollar cycle is not necessarily related to events in the Middle East, so, as a longer term policy proposal, I think the GCC would want to consider whether a more appropriate peg might not be a basket of currencies. You also suggest a GCC central bank. Doesn’t that require a high level of political union? That is an interesting issue that the Europeans are chewing over now. For the moment, let it be said that the Europeans have established a central bank without moving to political union but, certainly, there are those who argue that one follows from the other. What one can say is that having a regional central bank will certainly set up pressures to move further towards political union, but on the other hand it may be possible to emulate where the Europeans are now and simply stop at this stage. Europeans tend to think that the EU must go on, that the project has no end. That does not necessarily have to be the model that is followed elsewhere in the world. What do you feel are the economic prospects for the Middle East in the year ahead? For the year ahead, I think they are pretty good. I think there is a good deal of optimism in the area. Iraq is going to provide some important opportunities. At some point, the oil price is going to move down again because it is cyclical and, if there is now some sort of hiatus, then the countries in the region need to use the time as best they can to continue progress towards diversification. You mention Iraq and oil. What do you think will be the other main driving factors in the coming year? Politically speaking, the new Unites States policy that I mentioned, which I think is in earnest, and I think we will see it applied in bilateral relations. The other unknown is another September 11. I mean, a major terrorist outrage somewhere on the globe that had a devastating effect on investor confidence, on travel, as Sept 11 did, could be a setback to all our hopes.